“We abandon our Sell rating…seeing no indication that our thesis is playing out,” wrote New Street Research analyst Pierre Ferragu.
Sascha Steinbach/Getty Images for Apple
One of Wall Street’s last Apple bears has thrown in the towel.
Apple (ticker: AAPL) late Thursday posted better-than-expected results for the December quarter, driven in particular by a huge period for the iPhone. The company said iPhone sales in the quarter were $71.6 billion, up 9% from a year earlier, and about $4 billion ahead of Street estimates. The company also posted another quarter of impressive growth in services, with $19.5 billion of revenue, up nearly 24%. And Apple said supply constraints—which hampered results in the quarter, in particular for iPads—would be less severe in the March quarter.
Based on all of that, New Street Research analyst Pierre Ferragu abandoned his Sell recommendation on Apple shares, setting a Hold rating and $165 target on the stock. While he’s still no bull, Ferragu conceded in a research note Friday that his bearish thesis on Apple shares was simply wrong. “We abandon our Sell rating…seeing no indication that our thesis is playing out,” he wrote.
Ferragu’s old view was that there would be “normalization” of consumer spending on personal electronics coming out of the pandemic, and that we were headed for “an air pocket in iPhone replacement demand” as the average age of the installed base decreases. He also thought the fact that iPhone 13 “offers limited innovation” would slow sales. Ferragu had been expecting sales in the quarter to be down 10%-15% from a year earlier.
But the analyst now concedes that there are no signs of slowing iPhone demand. “Management made positive comments on iPhone demand, such as a record number of upgraders and strong double-digit growth in switchers in China,” he writes. “Against our expectations, share gains against Huawei may have played a significant role.”
The analyst noted that Apple’s gross margins improved sharply in the quarter—more than three percentage points—in part due to the popularity of the high end of the iPhone 13 lineup, where profitability is higher. “It may be that in the face of a weaker unit demand, Apple orchestrated strong channel support for higher-end devices, as seen with U.S. operators, and scarcity for lower-end devices, thus maintaining strong revenue momentum,” he writes.
Ferragu also says there appears to be “off the charts” consumer demand for the latest phones. “We have seen since the beginning of the pandemic exceptional consumer demand for high-end consumer electronics, and, against our expectations, we have seen no sign of a slowdown yet,” he writes “This environment may have simply broken traditional replacement patterns, making the iPhone 13 another phone exceptionally well received by consumers.”
The analyst says he now sees iPhone revenue growth of about 5% both this year and next year. Ferragu boosts his earnings-per-share estimate for Apple to $6.05 from $5.23 for this year, and to $6.59 from $5.50 for fiscal 2023. He now sees Apple’s fiscal 2022 iPhone revenue of $201.3 billion, up from a previous estimate of $176.7 billion; for FY 2023, he now projects revenue of $213.7 billion, up from $186.2 million.
Ferragu, however, isn’t ready to recommend the stock, either.
“We recognize the quality of Apple’s ecosystem…but, on the downside, we would still worry that the exceptional level of demand today results at some point in a material pullback, driven by a normalization of demand and exhausted replacement pent-up demand,” he wrote. “On the upside, we see limited room for multiple expansion, and even if we see continued earnings growth, enhanced by buybacks, we don’t see the stock appreciating sustainably faster than earnings growth.”
Apple stock on Friday was up 4.8% to $166.88.
Write to Eric J. Savitz at [email protected]
